Dec 6. Flatlining

–Once again the curve (should we even call it that anymore?) flattened further on Tuesday.  5/10 treasury spread closed at just 20.6, it was a bit over 40 in early October.  Part of the demand for the long end may be related to (underfunded) pension buying before tax laws change.  But clearly, the flattening trend has been in place all year.

–The chart below is 5/10 treasury spread vs DXY.  Ordinarily one might think that higher short end rates would have the effect of flattening the curve while supporting the ccy.  In this case the market appears to be looking past higher short term rates.  Indeed both 2’s and 5’s posted new high yields of 182.2 and 215.0.  2/10 collapsed to 53.4, down 4 bps on the day, while red/gold euro$ pack spread closed below 30.  Green to blue pack spread  settled just 8.625 and blue to gold 8.125.  After December’s move, will the Fed continue to hike into the predictive powers of the curve flattener?

–Copper was walloped yesterday with HGH8 down over 14 cents; early October’s run to new highs has vanished.  Stocks are getting a bit more unsettled, though VIX remains subdued.  Shanghai Comp took a spill this morning though has now regained much of early losses.

–Trades yesterday included late selling of 0EZ 9787p at 2.0 ref 9791. EDZ8 now print 9792.5; open interest in the 9787p fell 55k and is down to 372k.  Continued buying EDU8 9775/9762ps for 2.0… need a hike every quarter in 2018 to make this one work.

Chart: Dollar Index DXY in green.  Treasury spread 5 to 10 yr yield in white

Posted on December 6, 2017 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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